The UK as a global crypto hub

June 2023 | SPOTLIGHT | FINANCE & INVESTMENT

Financier Worldwide Magazine

June 2023 Issue

In 2022, the UK government announced plans to make Britain a global hub for cryptoasset technology and investment. Blockchain technology solutions will be at the heart of this, coupled with the utilisation of digital assets.

The plans included looking to bring stablecoins within regulation – providing a platform for their use in the UK as a recognised form of payment – as well as launching a financial market infrastructure ‘sandbox’ to test trading traditional financial assets using blockchain technology. Announcements have also been made in relation to plans for a central bank digital currency.

However, the use of blockchain technology and digital assets by a business will likely not be limited to the financial services sector and will ultimately cover all sectors as business leaders look to find new and innovative ways to operate and make their business more frictionless.

Regulation will undoubtedly play a key role and has understandably been a major focus of the discussion. However, the discussion goes wider than regulation and an understanding of the subject matter from a legal perspective is also key. For instance, how does the law recognise a digital asset solution and what legal implications arise, in addition to regulatory implications? At its simplest, a digital asset which is not recognised by the law risks being worthless.

In this article, we discuss the great strides which have already been undertaken by senior judges, the legal community and the English courts. We also discuss the regulatory position, where the UK is at an important crossroads, both in terms of looking to implement a regulatory landscape which provides the necessary regulatory protections, as well as looking to allow continued innovation and growth in a sustainable way. A key question that arises, for example, is how to regulate the decentralised environment.

UK Jurisdiction Taskforce

The UK legal community has taken a proactive stride to grapple with the legal issues thrown up by digital asset solutions. As part of a forward-looking attempt to promote the use of English law and the UK jurisdiction for technology and digital innovation, the UK Jurisdiction Taskforce (UKJT) was established. In 2019, the UKJT published its Legal Statement on the status of cryptoassets and smart contracts, analysing whether cryptoassets are legal property under English Law. This seminal statement has since been considered and commented upon in other jurisdictions including in Singapore. In 2021, the UKJT published its Digital Dispute Resolution Rules for incorporation into on-chain digital relationships and smart contracts, providing, for example, for dispute resolution in a short time period. And in 2023, the UKJT published its Legal Statement on the issuance and transfer of debt and equity securities using blockchain technology and the legal implications under English law.

Though the UKJT’s views are not binding on the English courts, the views expressed include the views of senior judiciary. As such, they provide a helpful analysis for business as well as the English courts when looking to grapple with these legal issues. The English courts have, at times, recognised the UKJT’s work in reaching conclusions.

English courts

Between 2018 and 2023, there have also been a number of interim judgments handed down by the English Courts suggesting that a cryptoasset is a type of property. The implication of this is that owners of the cryptoasset, such as bitcoin, could benefit from the various remedies courts can award in respect of property, such as the enforcement of property rights. These interim judgments have arisen in uncontested claims where the claimant was defrauded. The legal community now awaits a final decision from the English courts on this point, which will hopefully close down any doubt whether cryptoassets are recognised under English law as property.

The English courts have also continued to grapple with several other difficult issues that arise. For example, the English courts have looked at, and are continuing to look at: (i) issues of jurisdiction, such as which courts have jurisdiction to decide the dispute, a point which is particularly important given the global nature of cryptoassets; (ii) whether cryptoassets can be held on trust; (iii) whether security for costs could or could not be provided by way of cryptoassets; (iv) whether open-source bitcoin software developers owe fiduciary or common law duties of care to those that use the code to trade or store cryptoassets; and (v) service of proceedings on persons unknown by way of non-fungible token.

The strength and flexibility of the English legal system, coupled with the quality of its judges means that the English courts are and will likely remain at the forefront of developments in this area. As new and novel legal issues arise, a strong judicial system, in addition to the UKJT, will play a key role as the UK looks to provide a world-beating platform to attract and encourage wider spread adoption and investment.

Regulation

In contrast to leaps and bounds made by the UKJT and the English courts, the approach on the regulatory side has been, in large part, one of observing and assessing how other jurisdictions are grappling with regulation.

For example, Europe has very much led the way on the regulatory side with its Markets in Crypto-Assets (MiCA) Regulation which, when it comes into force, will introduce a new regulatory framework for digital assets in Europe. In comparison, there have been bespoke regulatory developments in the UK, such as in relation to anti-money laundering, whereby the Financial Conduct Authority (FCA) became the supervisory body for certain cryptoasset businesses in January 2020, following an amendment to the Money Laundering Regulations. However, the UK does not yet have an equivalent to the MiCA.

It appears, however, that this is all about to change. In February 2023, HM Treasury published a consultation paper titled ‘Future financial services regulatory regime for cryptoassets: Consultation and call for evidence’. This consultation is something the UK government committed to in 2022, to introduce a new regulatory regime for cryptoassets, reflecting the risks and opportunities they present.

The consultation paper sets out proposals for regulation of cryptoassets, marking the next phase of the UK government’s approach to regulating cryptoassets. This builds on previous HM Treasury proposals focusing on stablecoins and the financial promotion of cryptoassets. HM Treasury states that: “The proposals seek to deliver on the ambition to place the UK’s financial services sector at the forefront of cryptoasset technology and innovation and create the conditions for cryptoasset service providers to operate and grow in the UK, whilst managing potential consumer and stability risks.”

The consultation paper focuses on capitalising on a credible and well-established existing regulatory system, as opposed to developing a fully bespoke regime outside of the existing framework. Creating a bespoke regime risks leading to discrepancies in standards between crypto firms and traditional financial services firms. Furthermore, certain types of digital assets may already fall within the existing regulation.

The consultation paper provides an important juncture at which regulation of the digital asset world can be carefully looked at and assessed, providing an opportunity for the UK to set out a world leading regulatory framework that balances the risks faced, along with allowing for innovation, investment and transformational growth. It will therefore be extremely interesting to see the results of the consultation. Who feeds into the consultation will likely play a key role in the success of framing a regulatory regime that is fit for purpose. This includes how to answer key questions, such as how to regulate, if it can be regulated, the decentralised world.

Conclusion

The UK has the potential to become a global digital assets hub, from a legal and regulatory perspective. The UK has an innovative and entrepreneurial legal community and an adaptive judicial system. The significance of the Treasury’s publication of the consultation is a turning point for change in the UK’s regulatory landscape. The digital asset community eagerly awaits the outcome of the consultation and subsequent FCA response.

James Herring and Sivan Daniels are partners at Addleshaw Goddard LLP. Mr Herring can be contacted on +44 (0)20 7160 3980 or by email: james.herring@addleshawgoddard.com. Mr Daniels can be contacted on +44 (0)20 7160 3284 or by email: sivan.daniels@addleshawgoddard.com.

James Herring and Sivan Daniels

Addleshaw Goddard LLP